Understanding Oral Contracts

Oral contracts are arguably one of the most dangerous aspects of the law that exist because they leave much room for ambiguity. Although oral contracts are as legally binding as written agreements, they are significantly more difficult to prove in a court of law, and a written contract is thousands of times more preferable.

Should you have to go to court over an oral contract, one party or the other must prove that the agreement took place, and which terms were agreed to during the oral contract. This presents a difficult position for the judge, who must decide which side is lying, and whose story to uphold.

Not only that, but an oral contract will never be as all-inclusive as a written agreement. Very few people will sit down over coffee to discuss the assignment of attorney’s fees or to agree upon the modifications of the oral contract. Instead, oral contracts are typically one-sentence agreements that leave far too much room for assumption and ambiguity.

Some oral contracts are only partially written, while the rest is based on oral agreement alone. For example, two people might exchange e-mails which discuss an agreement for one person to sell the other a used item. Then, when they talk on the phone, they agree to what was discussed in the e-mails. The terms of the agreement can be proven through the electronic mail, but the agreement itself was oral and not witnessed by anyone but those two individuals.

There are a few types of oral contracts which are not enforceable under U.S. law. These include:

– Sale or purchase of land
– Goods or services valued greater than $500.00.
– Prenuptial agreements
– Dowries or other marital agreements
– Contracts with terms that exceed one year

Some oral contracts are also enforceable when sealed with a handshake, which is often called a “Gentleman’s Agreement”. For example, a court upheld a handshake agreement in 1987 between Pennzoil and Getty Oil after Pennzoil’s attorney shook hands with an executive officer of Getty Oil over a written contract that was never signed. The court found that an oral agreement had been made, and the damages exceeded 10 billion dollars.

The problem is that many people feel that oral contracts are sufficient to maintain a business deal between two individuals, which couldn’t be farther from the truth. Here are a few signs that you are getting into a bad business deal:

1. One party will only agree to an oral contract, and not a written one.

This should be a significant red flag for any savvy businessperson. If the party with which you hope to do business will only agree to an oral contract, then chances are that this is a potentially bad deal for you. Insist upon a written contract to protect yourself, or find someone else with whom to do business.

2. One party feels that a written contract signifies a lack of trust between the parties.

If you’ve ever watched The People’s Court, then you know that friends, relatives and even acquaintances get into legal and monetary disputes all the time. No matter how much you trust another person, a contract should be made in writing.

3. You’re worried that if you write it all down, the other party will decide not to agree to the contract.

If a contract – whether oral or written – is too far biased against one party or the other, it won’t hold water in court, anyway. Come to terms on a written contract that equally represents the interests of both parties.